Friday, 28 May 2010

Ukraine’s steel industry set to go through convulsions, consolidation

An alleged raider attack on the nation's third-largest steel mill points to consolidation of the critical steel sector

Ukraine, one of the world’s top 10 steel exporters, appears to be undergoing a major shakeup in the ownership of its mills. Russian capital is flowing in, sector consolidation is under way and dirty business tactics are, apparently, unavoidable.

The metallurgical sector, which accounts for 40 percent of Ukraine’s exports, took a turn toward transparency back in 2005, when the nation’s biggest steel mill, Kryvorizhstal, was resold by the state to multinational Mittal (now ArcelorMittal) for a record-breaking $4.8 billion in a nationally televised auction.

Now, another major Ukrainian steel mill, number-three ranked Ilyich, may be under attack by so-called corporate raiders intent on seizing the asset through dubious means. Whoever one believes – the mill’s management or the self-proclaimed new owners – Ilyich’s ownership and the future of the country’s metallurgical industry have already been tainted by legal nihilism.
When the smoke clears, all the country’s top five steelmakers could come under the control of an even smaller circle of Ukrainian oligarchs or their fellow billionaires in Russia.

On May 26, two men claiming to represent offshore companies registered in Cyprus, Boris Podolsky and Ilya Gorn, announced the sale of Mariupol-based Ilyich to an unknown investor.

“The sale took place in full accordance with the law and received all legitimate signatures,” Podolsky told journalists.
However, he declined to reveal the name of the new owner, asserting that no banks were involved in the deal and claiming that the transaction took place more than a year ago.

Moreover, according to Podolsky, no approval of the deal by Ukraine’s Anti-Monopoly Committee is necessary.
While short on details, however, Podolsky was long on promises. “We represent the interests of a large industrial group and therefore can guarantee that none of the plant’s employees, except management, will be dismissed. Moreover, there will be increases in salaries, which at Ilyich are currently among the lowest in the sector,” he said.

Sergey Mahera, a spokesman for the steelmaker, called the claims of Podolsky and Gorn “nothing more than an attempt to seize control of the mill.”
Mahera further linked Podolsky and Gorn to previous raider attacks against other Ukrainian companies.

He said that Volodymyr Boyko, Ilyich’s chief executive officer and manager of its shares, “took part in no oral or written agreement to transfer their ownership.”
A shareholders meeting at Ilyich Steel, the company behind the mill which is supposedly owned by the employees, was to be held in April. It was postponed following a controversial decision by a Donetsk court, according to the company.

On May 27, Ilyich released a statement claiming that the head of the registration company that maintains the records of the company’s shares had been replaced.

Yury Kravets, attorney for an Odesa-based business association called the Ukrainian Anti-Raider Movement, said it’s still not clear whether the events at Ilyich are a raider attack or a legitimate dispute. “A conflict exists, but it’s still too early days to say who’s doing what,” Kravets said.

Long before this week’s events, Ilyich’s Boyko had been vocal in complaints about other sorts of unfair pressure on his company, namely suspended value-added tax returns from the government and monopolization of the country’s abundant ore reserves by competing steel makers.

Jean Jouet, chief executive officer of Ukraine’s largest steel maker, ArcelorMittal Kryviy Rih, has also raised the alarm of the financial damage that suspended VAT payments can inflict on companies with limited ties to within the government.

“At ArcelorMittal Kryviy Rih, [overdue VAT reimbursements] have now reached more than Hr 2.3 billion. If you add to this income tax, an additional Hr 1.4 billion, then ArcelorMittal Kryviy Rih is today a creditor to the state for Hr 4 billion ($500 million). This is such a huge amount that the company is clearly facing severe cash issues today,” Jouet said in a statement.
Meanwhile, other steel players, both Russian and Ukrainian, are consolidating their positions on the market.

In a purchase valued by market insiders at $1 billion, a 50 percent stake in top-30 international steelmaker Industrial Union of Donbas (ISD Group) was sold to Russian tycoons. The group controls Ukraine’s modernized Alchevsk Metallurgical Plant, along with another Ukrainian mill, and factories in Hungary and Poland.

More recently, System Capital Management, the holding company of Ukraine’s richest man, Rinat Akhmetov, has been rumored to be eyeing the purchase of Zaporizhstal steel mill, the country’s fifth largest.

If the deal goes through, Akhmetov would consolidate control of two of Ukraine’s top five steel makers, making ore-starved and isolated Ilyich particularly vulnerable to takeover by Russian giants such as Evraz, which announced plans to acquire strategic Ukrainian metallurgical assets as early as 2007, or Severstal, which has been rumored to be eyeing steel assets in Ukraine as well, or possibly another Ukrainian oligarch.

Analysts and investment bankers have perceived such moves as part of a global trend toward consolidation, where producers are driven to take control of raw materials to ensure their position as suppliers.

“The consolidation and restructuring of Ukraine’s metallurgical sector is long overdue and is now accelerating due to both the fall out of the financial crisis and global trends in the sector. In addition, following the improved relations between both countries, there is a renewed interest of Russian capital to invest in Ukraine’s steel producers. In short, it is a mix of local, regional and international factors,” said Peter Vanhecke, CEO of brokerage Renaissance Capital Ukraine.

“A holdup of VAT returns as well as arestricted access toorereserves are additional disadvantages to some of the local producers. The VAT issue is aserious one across the whole Ukrainian economy and can have a crippling effect on the cash flow of even the strongest companies. Restrictedaccess to raw materials is a structural sector issue which often drives mergers and acquisitions and a drive to integrated business models,” he added.

No comments: